Nexus Industrial REIT

Thank you for standing by. This is the conference operator. Welcome to the Nexus Industrial REIT fourth quarter 2024 results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then zero. I would now like to turn the conference over to Kelly Hansik, Chief Executive Officer. Please go ahead.

Thank you. I'd like to welcome everyone to the 2024 Fourth Quarter Results Conference Call for Nexus Industrial REIT. Joining me today is Mike Rall, Chief Financial Officer of the REIT. Before we begin, I'd like to caution with regard to forward-looking statements and non-GAAP measures. Certain statements made during this conference call may constitute forward-looking statements which reflect the REIT's current expectations and projections about future results. Also during this call, we'll be discussing non-GAAP measures. Please refer to our MD&A and the REIT's other securities filings, which can be found on our website and at cdar.com, for cautions regarding forward-looking information and for information about non-GAAP measures. In 2024, we executed the strategic repositioning of Nexus to be the Canadian-focused pure-play industrial REIT, which has been several years in the making. First, we invested to improve our business. Our goal was to high-grade and optimize our portfolio, taking advantage of uncertain economic backdrop and weaker real estate market to acquire and develop high-quality assets at attractive prices. In the year, we made three targeted industrial acquisitions, Sorry about that. Acquisitions completed three industrial development projects and advanced two more. Next, we focused our portfolio by selling our legacy office, retail, and non-core industrial assets. These sales transition our net operating income to nearly 100% industrial and strengthen our balance sheet as we use the sale proceeds to reduce debt. Finally, we executed operationally, delivering strong industrial same property NOI growth through a combination of proactive leasing, realization of mark-to-market lift on renewals, and annual rental steps that are embedded into our leases. I'll dive into each of these actions in more detail. Starting with the development, this quarter was our first full quarter benefiting from our new Hubrie Road industrial intensification project, which added 300,000 of NOI in the quarter. We completed this 96,000-square-foot building in July, and it is yielding 8.4% in its first year on cost of $14 million. with significant rent escalations thereafter. It also builds on our leadership position in the highly desirable London market, which continues to be one of the tightest industrial markets in Canada. Our recently completed Titan Park property in Saskatchewan completed 500,000 of NOI this quarter. We finished construction on time and within budget in April, and the primary tenant took occupancy immediately. A second tenant for the remaining 112,000 square feet is now taking occupancy. The property adds annual stabilized NOI of $3.8 million, representing a 7.9 cap rate on our investment of $48 million. We're currently looking for a tenant for our 115,000 square foot Clover Road new build in Hamilton, which we completed in the summer. We own 80% of the property and we'll earn a 5.9 going in yield on our $25 million share of the development costs. The market has definitely slowed in Hamilton, but we're optimistic that it should be leased within the year. In the fourth quarter, we advanced construction at our Dennis Road property in St. Thomas, which is scheduled for completion in the early third quarter of 2025. This project is a 325,000 square foot expansion for an existing tenant at an estimated cost of $55 million. The tenant pays a 7.8 interest on the development costs that we incur during the construction phase, so there's no financing drag on our cash flow. Upon completion, the tenant will pay us rent equal to 9% yield on the development costs. This quarter, we also started construction on a new 115,000-square-foot small bay industrial building on a vacant land that we hold at 102 Avenue in southeast Calgary. The total project cost is $15 million and is expected to deliver a 12% unlevered return. Scheduled to be completed in August, it is already generating a lot of rental interest, and it looks like we have tenants lined up for approximately 7 of the 10 units already. Turning to asset sales, through 2024, we furthered our transition to a pure play industrial REIT by selling our legacy office and retail properties, as well as four non-core industrial buildings. In the fourth quarter, we closed on the sale of two of the office buildings, one mixed-use industrial property, and four non-core industrial buildings for a total proceeds of $48 million. We also sold another office property for $4 million, which closed in February of 2025. We are closing this month the sale of our legacy retail portfolio, except for one building, for $47 million. Combined as part of the transition, we have sold a total of $120 million in properties at a blended cap rate of 7.1%. We are using the proceeds to reduce our debt and to fund the remaining development. Following these sales, our industrial NOI concentration will be nearly 100%. We will be left with one retail building and two office buildings. The retail building is Les Halles d'Anjou in Montreal. It has surplus land, and we are selling that separately from the building. Once this land is sold to a condo developer that we've been working with over the last couple of years to get approval, and it looks like it's imminent, we'll then sell the building. Our partner in the project has already expressed their desire to own the property, so we expect a smooth sale mid-year. The final two office buildings are joint ventures, where we generate significant asset management fees, and we're not currently marketing them. Turning to operating performance, we had a strong fourth quarter. Our normalized FFO improvement improved 2.7% to 19.2 cents per unit, and our normalized FFO improved 2.5% to 16.1 cents per unit. In both cases, the increase was driven by strong net operating income in our industrial portfolios, which was up 1.3% or $400,000 compared to last quarter. Compared to a year ago, our total net operating income was up 10% or $2.9 million to $32.1 million in the quarter. The NOI increase was largely driven by three factors, acquisitions, organic growth, and development. New properties that we acquired in the past year contributed $2.2 million to NOI. Same property NOI increased by $1.2 million. driven by 5.1% industrial same-property NOI growth from the lease-up of our Richmond, B.C. property, as well as mark-to-market lift on renewals and embedded rent steps in our leases. Our recent developments at Titan Park in Regina and Hubrie Road in London contributed $800,000 in the quarter. On a full-year basis, the actions we've taken in the embedded rent escalation in our leases resulted in industrial same-property NOI growth of 4.7%. Looking forward to 2025, we have already renewed or are extremely close to renewing approximately 65% of our leases or 1.1 million square feet of the GLA that was set to expire this year. The growth in expiring rents for these renewals is 32%, representing 3.2 million of additional NOI. We are in discussion with the tenants of the remaining 35% worth 700,000 square feet. Of this amount, the largest chunk, 280,000 square foot, is our Chatham, Ontario property, tenanted by our London property, who has indicated that they will renew. We've recently become aware of two tenants in the portfolio who have entered creditor protection that could impact results beginning Q2. PV Mart is a tenant at one of our buildings located at 40 Avenue in Red Deer and at Clark Road in London. So we own their Eastern Canada Distribution Centre and their West Canada Distribution Centre. If they early terminate, which we expect them to do, probably it's effective either in April or May, it will take us time to find a new tenant in Red Deer as the building is quite large for that market and it generates an annual NOI of about $1.3 million. In contrast, I anticipate we'll be able to quickly find a new tenant in London, given it's currently leased well, well below market. I expect we'll be able to remain whole in this building for 2025, if all goes well. The second tenant occupies our crosstalk facility at 102 Avenue in southeast Calgary. If required, we should be able to find a new tenant quickly here, too. However, there's a good possibility that a new owner will step into the business and take on the lease, mitigating any impact to Nexus. Despite these potential headwinds, due to our solid leasing activity on a full-year basis, I expect we will be able to achieve mid-single-digit industrial same-property NY growth for the year. In summary, we continue to advance our strategy in 2025 as Canadian pure-play industrial REITs. We are making excellent headway on our developments, which will be completed in Q2, Q3. We have firm sales contracts for our retail portfolio, which closes in March, and we'll further focus our portfolio and de-lever our balance sheet. And we'll continue to realize organic growth through embedded rent steps and positive mark-to-market on renewals. I'll now turn the call over to Mike to give some more color on our financials.

Thank you, Kelly. Good morning, everyone. Starting with the headline earnings in the quarter, net income was $49.7 million, a $47.5 million increase compared to a net income of $2.1 million last year. The increase was primarily due to a higher gain on the fair value adjustment of Class B LP units by $49.6 million, a higher gain on derivative financial instruments by $24.5 million, a higher NOI by $2.9 million, and a lower general and administrative expenses by $1.4 million, partially offset by a lower gain on investment properties by $27.5 million and higher net interest expense by $1.6 million. As Kelly mentioned, our Q4 net operating income increased 10% or $2.9 million year over year to $32.1 million. Of this amount, New acquisitions accounted for $1.6 million. An increase in same property NOI added an additional $1.2 million, and development projects accounted for half a million dollars. This growth was partly offset by half a million dollars relating to asset dispositions made since the third quarter of 2023. Normalized AFFO for the period was 16.1 cents per unit, compared to $0.15 per unit a year ago, primarily driven by higher net operating income. Total general and administrative expenses for the quarter were $1.7 million, which was $1.4 million lower than a year ago, predominantly due to lower severance and one-time compensation expense. Net interest expense in the quarter was $14 million, a $1.6 million increase from the same period last year. The increase was primarily due to a higher outstanding average debt balance, resulting from borrowings to fund acquisitions and development, as well as lower capitalized interest due to the completion of development projects. At December 31st, 2024, our NAV per unit was $13.19, a 13 cents per unit increase from last quarter. Our weighted average cap rate increased one basis point to 5.82%, compared to 5.81% at September 30th. The carrying value of our investment properties increased by $8.2 million in the quarter, primarily due to development spend of $18.9 million, capital expenditures and tenant incentives of $5.8 million, and $11.6 million of positive fair value adjustments, partially offset by a $27.8 million reduction from the disposal of four industrial properties located in Saskatchewan. I'll now turn the call back to Kelly.